S&P In Orderly High-level Consolidation

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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Monday December 28, 2020.

Stocks closed higher after a shortened session on Christmas eve, with tech stocks gaining as the long-awaited stimulus is delayed. The Dow Jones Industrial Average climbed 0.2 percent to 30,199.87, while the S&P gained 0.4 percent to 3,703.06. The Nasdaq Composite rose 0.3 percent to 12,804.73.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 7 percent to 21.53.

Shares of Alibaba (BABA) slumped 13 percent after China said it is investigating the company for anticompetitive practices. Shares are down 30 percent since hitting all-time high in October. Alibaba, built by billionaire Jack Ma, said it will cooperate with regulators.  As such, the iShares China Large-Cap ETF (FXI) fell 1.67 percent on the day but is up about 3 percent YTD, underperformed the S&P.  Now the question is what’s next?  Below is an update look at a trade in FXI.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  As shown, the underlying is in a short-term bullish trend when the price bars are painted in green.  The underlying is in a short-term bearish trend when the price bars are painted in red.  The yellow bars identify period of neutral or sideways trading pattern.  Additionally, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).  Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – iShares China Large-Cap ETF (weekly)

Our “U.S. Market Trading Map” painted FXI bars in red (sell) – see area ‘A’ in the chart. Over the past few weeks, FXI has been trending lower in a short-term corrective mode after the October rally ran out of steam near the spring 2018 recovery high.  The early December selloff pushed the ETF below the 2020 rising trend line, signify a bearish breakout and downside reversal. The overall technical backdrop remains negative, increased the probability for a retest of support near the 41-42 zone, or the 1-year moving average and the 50% Fibonacci retracement.

The 2020 rising trend line, round 46.50, represents the logical level to measure risk against.  All bets are off should FXI close above that level.

Chart 1.2 – S&P 500 index (daily)

Short-term technical outlook remains bearish (sell).  Last changed December 22, 2020 from bullish (buy) – (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Not much has changed since last update.  S&P continues basing sideways using the lower boundary of the pink band as support.  That level was tested several times over the past months.  Technically speaking, the more often support is tested the weaker it becomes.  Money Flow measure flashed a weak bearish signal as it trended higher from below the zero line, indicating selling pressure had eased.  Market internal has somewhat improved but upside momentum does not appeared strong enough to generate widespread breakout.

For now, the lower boundary of the pink band, around 3680, is the line in the sand.  A failure to hold above it indicated that long-term buying pressure has been exhausted and a much deeper pullback should be expected and we’re looking at 3560, based on the trend channel moving average.

The December high, around 3725, acted as strong resistance.  A close above it is required to neglect the short-term sideways trading pattern.  With that said, there is no reason to turn particularly bullish until this area is eclipsed.

Short-term trading range: 3680 to 3780.  S&P has support near 3680.  Below it, a more significant support lies at the trend channel moving average, currently at 3560.  Resistance is around 3780.  A sustain advance above that level has measured move to around 3900.

Long-term trading range: 3200 to 3800.  S&P has support near 3200.  A failure to hold above that level has measured move to 2900.  The index has resistance near 3800.  A close above that level has measured move to 4100.

In summary, the big picture remains the same.  There’s an orderly high-level consolidation period near the lower boundary of the pink band, around S&P’s 3680, which represented the digestion period in the aftermath of the late October rally.  Market internal has somewhat improved but upside momentum does not appeared strong enough to generate widespread breakout. So it should not be surprising to see further backing and fillings in the coming days.

 

Thanks and happy trading.

(By:Michelle Mai for Capital Essence)

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